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Monthly Archives: November 2009

≈ Comments Off on Realty IPOs in the pipeline may remain just pipe dream

The financial troubles in Dubai, the desert state which over the last few years had gotten used to showcasing its grand real estate properties like Burj Dubai and The Palm to the world’s billionaires, could be a warning sign for all real estate investors. After all the current debt rollover, which many say is technically a default, has its roots in those grand real estate projects.

The ill-effects of blowing up of this construction-led bubble in the desert could soon be felt on the IPO street in India too. With investor sentiment related to real estate IPOs not at in a comfort zone, from now on the going could tough for merchant bankers and promoters of real estate companies that are planning to tap investors for funds.

Nine real estate companies have already filed their draft prospectus with Sebi, planning to tap investors to raise an estimated Rs 15,000 crore over the next few months. Although merchant bankers are trying to put up a brave face saying that Dubai’s troubles will mostly be limited to the region, brokers and dealers, who directly deal with investors on a daily basis, feel otherwise. “Currently investor sentiment is quite low. And it’s very difficult to raise money, whether it is a real estate company or a company from any other sector” head of a domestic financial services company, who was recently involved with a number of IPOs, said.

“The Dubai factor will affect investor sentiment and they will be more cautious,” the official said. The not-so-good performance of several real estate IPOs will also play on investors’ mind when these offers hit the street. Stocks of some of the realty companies that had gone public during the 2005-2007 boom period, are currently trading at discounts as high as 75%. The excessive supply of stocks of realty companies could also affect forthcoming IPOs, market players said.

One of the way out could be slash the IPO price drastically, a move that many feel unlikely to go down easily with the promoters of these companies. For investors however this could prove to be a good opportunity to pick up fundamentally good realty stocks at attractive valuations, said an independent investment analyst.

For bankers, who were reluctant to lend to the housing sector, there has been a change in mood. Now, there is a sense of willingness to lend, though that is largely restricted to the affordable housing segment. This is priced at approximately Rs 4 lakh all the way to Rs 30 lakh.

We have seen an interest reappearing in the real estate sector in the past few months. A growing number of our customers have been availing loans for affordable housing projects, said Axis Bank senior vice-president retail banking Sujan Sinha. Another official at a public sector bank said with the revival in the market, banks are in the lending mode, with a lot of potential existing in the affordable housing segment. It is gathered that builders have now started terming their projects as affordable housing segment. It is gathered that builders have now started terming their projects as affordable housing by cutting down on certain luxuries that were initially planned.

Niranjan Hiranandani, MD, Hiranandani Group, admits that a host of developers have converted their projects to affordable housing from what was luxurious. Though, there is a greater demand for affordable housing projects that could change by the end of the year, he said.

The definition of affordable housing depends on the builder and the location. Tata Housing set the ball rolling a few weeks ago by launching its project in Boisar, which is a two-and-a-half hour train ride from Mumbai. Company officials concede that margins are on the lower side at 20-25% compared to 40% for more expensive housing.

Loans are available for builders at 13% compared to 15% a while ago. Bankers have been favouring affordable housing projects, since that is where demand could see the largest rise, said Shobhit Agarwal, joint managing director, Capital Markets, Jones Lang LaSalle Meghraj (JLLM). Builders, for their part, have reduced the size of their apartments, apart from cutting back on frills like a gymnasium.

According to Kapil Wadhawan, vice-chairman, Dewan Housing Finance, there are projects that are coming up even in the tier I cities that can be classified as affordable. An average loan size for our company is Rs 6 lakh and we expect to find more customers in large cities, such as New Delhi and Mumbai, which was not the case earlier, he said.